LESS TALK , MORE ACTION @ TECH DATA

[Anonymous]

A Little Less Talk, a Little More Action at Tech Data
No more excuses. Now that IT product distributor Tech Data says it’s done with its Europe, Middle East, and Africa restructuring, it’s time to get back to business and squeeze some more blood from those bone-dry stones.
If you’re not familiar with the company, let me point out that it operates in an extremely low-margin business. Tech Data and rivals like Ingram Micro and SYNNEX routinely run on gross margins below 6%, and net margins very close to that red line. Any change in pricing power, operating efficiency, or tax rates can have a tremendous impact on the bottom line, given that increasing the net take by one percentage point is likely to double the dollar amount.
That’s why the completion of that two-year restructuring project is so important: Not only does the company get to reap the operational benefits of this belt-tightening move now, but it also no longer has to pay for the process. This quarter, $8.9 million was earmarked for the EMEA changes, bringing the total restructuring cost to almost $55 million over the past six quarters. That’s a heavy load for a company that made a net profit of $32.6 million over the past year, including the restructuring cost but excluding a $155 million goodwill impairment charge in the previous quarter.Computer system builders like Dell and Hewlett-Packard are often held up as paragons of virtue when it comes to making profits out of massive revenues and sliver-thin margins, but those guys have significant server hardware and support services departments, which bring margins up from the 4% or so where their PC segments usually dwell. A fairer comparison would be Gateway, which doesn’t have the luxury of falling back on those cash cows when times get hard, and currently sports a 6% gross margin.An investment in businesses like Ingram Micro, Gateway, or Tech Data, then, is a vote of confidence in the management team. Tech Data pushed $21 billion worth of high-tech commodities through its systems over the past year. But a hardware distributor doesn’t get to skim much off the top of each order, and the challenge is to make the operation run with as little friction as possible. Again, any small improvement stands to bring in huge benefits. 

[Author]

November 29, 2006 at 2:00 PM